Before you make investment in any mutual funds in India, apart from the scheme related details an investor should know the tax implications on capital gains arising out of his or her investment. To put it in simple words, capital gain means the difference between the sale value of your investments and the initial purchase price. Capital gain from investment in Indian Mutual funds are taxed depending upon the holding period and the type of funds you invest.
The capital gains earned in the short term are known as short-term capital gains (STCG). The capital gains earned in the long term are known as long-term capital gains (LTCG).In case of equity mutual funds in India, a holding period of up to one year is regarded as short term and a holding period of more than one year is referred to as long term. In case of debt mutual funds in India, a holding period of up to three years is referred to as short term and more than three years is regarded as long term.
Equity mutual funds in India and debt mutual funds in India are taxed differently according to their holding periods. The short-term capital gains (STCG) on redemption of units of equity mutual funds in India are taxable at the rate of 15 percent. The long-term capital gains (LTCG) on equity mutual funds up to Rs. 1 lakh is tax-free. However, LTCG on equity mutual fund redemption in excess of Rs.1 lakh is taxable at the rate of 10 percent without the benefit of indexation.
The STCG on redeeming units of debt funds forms part of the total income of the investor and is taxable according to his or her income tax slab. However, the LTCG on debt fund redemption is taxable at the rate of 20 percent with the benefit of indexation.Our post about TDS on interest on NRO deposit contains some more thoughts on this matter.